Art investment has become more popular than ever, but do paintings and sculptures really have a place in your portfolio – and how to start out?
Art investment is not a new topic, but it’s taken centre stage since Covid-19 began to affect the global economy. Investors facing numerous challenges presented by the pandemic are holding back on more risky strategies and redirecting their attention to the art market, which has proven to be resilient and shown to be enjoying an overall upward trajectory while other asset classes are suffering from volatile and unpredictable fluctuations.
The reason is simple – art should be considered an entirely different form of investment from others. Compared to traditional assets, whose performances are driven by macroeconomic market conditions, government policies and the fluctuating cost of fundamental assets, the evaluation of an artwork is heavily dependent on its cultural value, which is generally unaffected by short-term global events and can typically withstand the test of time.
As Villepin gallery co-founder Arthur de Villepin explains, “The long-term social impact and function of an artist directly influence the way we understand the world. Their identities and works, which evoke such strong emotions in past and modern societies, shape our social and cultural history. No global crisis will cause permanent damage to the value of artworks that have successfully pushed boundaries and changed perceptions. Because their impact on our ethos at one point in time is so indisputably significant, they’ll always be sought after by buyers.”
Unlike stocks, shares and bonds, rapid fluctuations are absent in the art trade. As seen on the Sotheby’s Mei Moses Index, which leverages more than 80,000 repeat auction sales of the same object over time and is regarded as the preeminent measure of changing demands in the global art market, the works of time-tested market favourites such as Picasso, Warhol and Zao Wou-Ki perform with flying colours in every sale. Based on the index, the market has enjoyed a steady uphill trajectory in the past 70 years despite bigger movements in the 1980s and ’90s.
All this indicates that when considering buying a piece of art, it’s best to be prepared to keep it in your possession for a long time rather than aim for fast, short-term profits. The sentiment is shared by collectors and dealers alike. According to Leo Xu, senior director of David Zwirner gallery, “Art isn’t comparable to other commodities or to the stock market. You have to grow with the art you love and bought, because the value of art accumulates organically with time. Don’t look for the promise of overnight successes, because such information is largely based on risky speculation. Buyers or collectors should be prepared to keep the art they purchased for at least a few years before
considering a sale. Allow yourself time to enjoy the pieces you acquired and over time you can review your collection based on market performance to see if there are worthy opportunities to trade a few of your items.”
Even with the confidence that art can be an attractive investment asset, beginning a journey in art collecting can seem intimidating. Takako Nagasawa, international specialist in 20th-century and contemporary art at Phillips auction house, agrees. “When starting out it can be extremely overwhelming,” she says, “but getting as much exposure to different types of art is the best way to wade in.” Nagasawa suggests immersing oneself in “anything from attending fairs and gallery openings to simply following museums, auction houses and artists on Instagram. The more you see, the more you’ll learn about what types of artworks speak to you, and then you’ll have a much clearer sense of direction. Also, jumping in, buying something and then hanging it in your room can also tell you whether it’s the type of work you grow to love more. I have some works I bought many years ago that I still love, and some that sadly are now tucked away. As a collector, I think this trial and error builds your taste.”
Before diving in, it’s essential to understand the potential risks of collecting and investing in art. First and foremost, you must learn how to confirm to your best ability that the item in question is authentic, and the way forward is to fully understand the art work’s provenance. This is easy if the piece is bought directly from the artist or a gallery that works closely with the artist. In other cases, it’s vital to investigate in detail the chain of ownership of the object from the moment it leaves the artist’s studio. To minimise risk, Jenny Lok, head of business development and operations at Poly Auction Hong Kong, advises that “it’s crucial you purchase from a reputable source, such as an established gallery or auction house. These agencies will collect all relevant provenance documentation, as well as any publishing and exhibition history. In some cases, the work will even come with a certificate issued by the artist or their foundation as indisputable evidence of authentication. Moreover, these organisations have specialists who know exactly what to look out for – there are sometimes signs that the untrained eye won’t notice, but a seasoned professional can spot within seconds.”
Additionally, established international art fairs that bring together galleries from around the world are also reliable marketplaces to shop in. There, you’ll be able to speak to gallerists and possibly artists in person, as well as view works of art in the flesh. Previews by reputable auction houses provide similar viewing experiences and, as Lok says, the pieces shown at these events have already been authenticated by in-house specialists, so buyers can confidently make buying decisions. Above all, it’s simply best to acquire an artwork in person and allow your instincts to come into play and guide your judgments. Avoid online transactions where transparency is low and it’s difficult to verify the seller’s identity.
Another soft risk in art investment is the practice of chasing generic art trends without doing your own research. Art purchases based on short-term hype could land you in a speculative bubble, which could burst and devalue the item overnight. We saw such crashes in the 1990s and between 2008-9, which indicate the inevitability of future speculative bubbles. Even if you’re able to avoid becoming a market-downturn, there are no sure wins in trading art, as each piece is completely unique with a degree of intangible value. Thus it’s important to curate your collection based on your taste and preferences, and to allow your art collection to add social and cultural value to your life on top of monetary returns.
If you’re interested in diversifying your portfolio with art investments without spending the time on researching and buying individual works, art-related financial services could be the solution. As art is increasingly recognised for its stable investment potential, financial institutions have expanded their offerings in art services, mainly focusing on advisory, lending and investment. With the growing participation of financial establishments in the art trade, Nick Buckley Wood, director of private sales for Sotheby’s Asia, says that “as art investment becomes more widespread and institutionalised, various funds have shown a short-term track record of steady returns. For those without the time or interest to learn about the art market and the works themselves, this can be a successful investment strategy. Most private bankers and portfolio managers will suggest allocating around 10 percent of your investment portfolio to art or similar alternative investments. Some art funds can perform very well, especially when the financial markets are also performing well.” However, Wood believes “the journey of researching, purchasing, owning and displaying an artwork is far more interesting and rewarding than buying a share in a fund. By buying a real piece of art, you can enjoy the artwork as well as its investment potential.”
When eventually it’s the right time to sell a piece from your beloved collection, consider returning to the original seller you bought it from as your first choice. Not only is this a respectable practice within the art world, but you’re more likely to make a satisfactory sale this way. As the original seller is probably well connected to and have knowledge of other collectors looking for works similar to the one you’re offering, it’s often the most direct way to make a swift sale. Auction houses are also great platforms to trade on; just be mindful of high commission rates that could potentially make a dent in your profit.
Art collecting should be a journey, one that’s enjoyable and adventurous while also adding solid alternative assets in your investment portfolio during times of economic instability. Take the time to do your research and groundwork, acquire art that brings you joy and slowly build a collection you’re proud of. The rewards, in many forms, will come on their own.
This story first appeared on PrestigeOnline Hong Kong